What Drives Private Equity Returns?– Fund Inflows,Skilled GPs,and/or Risk?*

This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry that yield the putative ‘money chasing deals’ phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy‐out funds. In the context of a WLS‐regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand‐alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.